Monday, 25 April 2011

Just when you thought that it couldn’t get any worse along comes a new piece of EU “solidarity” that can only make our bad situation even worse. Tanaiste Eamon Gilmore has admitted that Ireland’s will be required to pay approximately €9.87 billion towards the new permanent EU “bailout” fund, the “European Stability Mechanism”. His Dail admission on 13th April was in reply to a question from People’s Movement patron Independent Deputy Thomas Pringle.

To establish this body, it is proposed to amend the Lisbon Treaty by inserting an new section to Article 136 of the Treaty on the Functioning of the European Union (TFEU). As a consequence, from June 2013 the new fund will succeed the European Financial Stability Facility and the European Financial Stabilisation Mechanism to provide loans to Eurozone members strictly conditional on the implementation of a range of adjustment measures.

Whatever the situation may be in 2013, in 2011 the debt of Greece, Ireland, Italy, Portugal, and Spain, will top €502 billion, and the financial requirements of Spain’s central and local governments alone are estimated to be around €470 billion up to 2013 The amount in the fund will be. €700 billion, with a loan capacity of €500 billion.

Obviously feeling under pressure, Mr. Gilmore claimed, “The manner in which the ESM is structured means that each country’s contribution will not impact on its general government deficit“.

His reasoning? Eurozone Member States will only actually disburse €80 billion, in five annual instalments starting in 2013. A remaining €620 billion of the subscribed capital will be made available by way of “callable capital” and guarantees.

But as Wolfgang Manchau has pointed out, Financial Times 28th March

“But here is the crux: Germany and France whose sovereign bonds have a triple A rating would not need to put up actual money to cover any shortfall of paid-in capital. A guarantee would do. But countries with lower ratings such as Italy, Spain and yes Portugal, Ireland and Greece would have to pay cash. So we are in a perverse situation. Countries with easy access to capital can proide cheap guarantees, while the weaker countries must put forward cash…..since this guarantee has to serve as the equivalent of a pre-paid cash payment, a guarantee by a non-triple A rated country would not cover the shortfall”

For example, it has been estimated that for every €100 billion that may be necessary to "save" another country or countries of the euro, the Italian budget will be burdened by almost €18 billion (equal to the percentage in the budget of the European Central Bank), about one percentage point of Italian GDP, and this would occur at the worst possible time, when the markets would likely require high and rising interest rates.

How credible is the Tanaiste‘s attempt at an appeal to Irish self interest? “We have to bear in mind that it is a fund and mechanism which we want to have available to us“.

Unlike the IMF, whose decisions require a simple majority of the shares, the ESM decisions of approving a loan, determining the interest rates and the terms of conditionality, require the unanimity of Eurozone finance ministers. Each country is effectively given a veto power on the Board.

It is not difficult to imagine scenarios like the following: country G, which is in good financial health, trades his consent to lend to country I, in exchange for the latter consenting to adopt the very policy measure that mostly benefits country G e.g. the increase in the corporate tax rate. What then Mr Gilmore?

Tanaiste Gilmore also confirmed that the Government continues to hold to the same anti-democratic stance as its Fianna Fail predecessor and that it will not put the proposed amendment to the EU Treaties to the people in a referendum. Deputy Gilmore cited an Opinion of the last Government’s Attorney General as the authority for this stance. Needless to say the loyal Fianna Fail “Opposition” did not object to this nor to Mr. Gilmore’s refusal to publish the Opinion.

But the Government and Opposition are walking on thin ice in adapting this stance. Democracy is being denied so that the German and French Governments and the Brussels top brass will not be inconvenienced. However the principles laid down in the 1987 Crotty Judgement of the Supreme Court may yet come back to catch them out.

Separately, the German Government anxiously awaits a ruling of the German Constitutional Court on the compliance of the current temporary EU “bailout” fund with the German Constitution.

The German Court may find that the type of conditional loan that was pushed on this country last November to be in conflict with key Articles of the Treaty on the Functioning of the European Union, - Articles 125, 123 and 122. The proposed ESM will replace the temporary one from 2013 but is open to challenge on the same grounds.

Ireland was pressurised into taking this loan to ensure that insolvent Irish banks would not go bust and that their debts would be shifted onto the Irish State and the Irish people so that German, French, British and other banks which had provided massive loans to them would not make losses on their reckless lending to the Irish banks and property market.

The Kenny/Gilmore Government supported by Fianna Fail are determined to brazen it out and not hold a referendum. This stance must be challenged in every way possible..

Election Promises – lest we forget!

Fine Gael election manifesto;

Make the bond-holders share the burden of the debts of insolvent financial institutions. This can be done unilaterally for most junior bondholders, but should be extended – ideally as part of a European-wide framework – for senior debt for insolvent institutions like Anglo Irish and Irish Nationwide that no longer have any systemic economic importance.

Feb 16th. The European Union's Economic and Monetary Affairs commissioner, Olli Rehn, said

"There is simply no appetite for considering senior bondholders in this context because we want to avoid any kind of potential contagion effect and therefore this issue is not at the table and that was made very clear yesterday in the meeting of the Eurogroup."

April 1st. Enda Kenny said ‘there appears little appetite in Europe to go beyond the €5bn worth of subordinated debt that is being written down’, words echoed by Finance Minister Noonan in an RTE interview later that day. So guess who’s pulling Fine Gael’s strings!

Labour election manifesto;

Labour believes that bank bondholders should share in bank losses. Depositors must be fully protected. Labour will seek to ensure that burden sharing with bondholders is part of a renegotiated deal.

April 2nd. The Labour Party’s former Finance Spokesperson and now Minister for Social Protection Joan Burton said Ireland should be facilitated by Europe in return for not touching senior bondholders. “We should now get a quid pro quo in respect of two items. The first is a reduction in the interest rate and the second is a renegotiated long-term debt package,” she told The Irish Times. Well, aren’t we really good pupils!

Bruton wants companies from Brazil, China and South Africa tendering for public procurements in Ireland – FG’s job stimulation programme!

Last week, Richard Bruton,minister for jobs, enterprise and innovation signed a declaration with nine other such ministers from other EU member states, following the publication by the European Commission of the Single Market Act, a strategic initiative to reinvigorate the single market by the end of 2012.

The declaration followed in the wake of the meeting of European heads of state and government on 24-25 March and was filled with lofty aspirations such as their desire ‘to see a Europe that allows the increasingly important services sector to thrive and achieve its full economic potential’ and the need to ‘remove restrictions that inhibit access to the EU's service markets, reduce the number of regulated professions within the EU and make a firm commitment to implementing and enforcing the services directive’.

They then state their belief that ‘there is no contradiction between the rights of the citizens, as workers and consumers, and growth and competitiveness oriented policies’ going on to oppose ‘proposals such as those previously announced by the Commission to reduce the opportunities for companies from Brazil, China and South Africa to tender for public procurements in Europe should be strongly resisted. These proposals risk leading to fewer tenders, higher prices and increased costs for taxpayers in Europe’.

It is clear from this position that Bruton favours companies from Brazil, China and South Africa tendering for public procurements in Ireland despite the precarious situation in the jobs market here. One need hardly be an economist to accept that these companies would win many contracts as his criteria of low prices, more tenders and less cost to the taxpayer would easily be met by contractors from these low-wage economies. However, job opportunities for Irish workers and those from other EU member states in the Irish workforce, of whom there are presently 220,000 according to the CSO, would be seriously diminished.

Perhaps this is what Fine Gael means by a jobs stimulus package, a package that incidentally will cost €1.6m and has to be revenue neutral, that is, the funding will come from further cuts elsewhere. However, it seems that the minister for jobs, enterprise and innovation is not thinking primarily of an Irish jobs stimulus package.

The declaration concludes with a call to arms; ‘Together, and with others in the EU who share our views, we will fight for a single market that supports these objectives’ and is signed among others by Maxime Verhagen, deputy prime minister and minister of economic affairs, agriculture and innovationthe Netherlands and Edward Davey, Britishminister for employment relations, consumer and postal affairs.

The human cost of austerity

Suicide is now the most common cause of death among 15 to 24 year olds in Ireland and a disturbing feature is the level of male suicide, which accounts for 80% of all deaths in that age group. Ireland has the fourth highest rate of youth suicide in the EU.

Research dating back to the 1890s demonstrates that the incidence of suicide or mental illness increases at times of recession and that suicide is linked with financial difficulties. It should not come as a surprise, therefore, to learn that we are continuing to see higher stress, suicide and mental illness levels in the current economic climate. The potential psychological impact of the economic recession on public health is severe. Persons who are unemployed are three times more likely to die by suicide than those in employment. The high rate is partly due to the fact that people with a psychiatric illness are at greater risk of losing their jobs. There is a close association between unemployment and suicide. However, even among individuals with no record of serious illness, unemployment is associated with a 70% greater risk of suicide.

And yet the EU/IMF austerity measures imposed on this country and so enthusiastically embraced by our new government, will increase unemployment, close even more hospital beds and curtail the availability of counseling services for those at risk. This is but one of the results of the harsh of the terms of the bailout.

The bank guarantee foisted on us by the FF/Green coalition and the bailout from the EU/IMF are a huge crimes perpetrated on the people of this country in order to save the Euro and secure the German and French banks that irresponsibly doled out money to the banking system in this country. And while Trichet and the ECB correctly point to the lack of governance in Ireland, the ECB itself was aware of what was happening and did not take measures to cool the situation. They have to take some responsibility.

The new government which is now making a virtue of having spared the bondholders owes a clear explanation to the people of this country regarding how events unfolded leading up to the crisis and the role of the Euro, the EU and continental banks in its creation.

And with Portugal now joining the ranks of the ‘bailed – out’ an opportunity exists to forge a coalition of peripheral countries that could act collectively. Now is the time to begin planning for a default instead of – as increasing numbers of economists predict – drifting into default in a couple of year’s time. Contagion is on the march and our negotiating position is improving. The big question is whether the FG/Labour coalition has the courage to do so.

The Greek government is introducing new austerity measures aiming to raise €25 billion over the next four years. The measures will focus on tax hikes rather than cuts to social services, with an increase in road tax, the extension of excise duties to non-alcoholic beverages – it couldn’t happen here! - and an increase in the VAT rate from 13 percent to 23 percent on certain items.

A number of public bodies will be abolished and a restructuring of wages and conditions in the civil service will be undertaken. The additional austerity measures aim to bring the country's deficit to below three percent of GDP, as required under the terms of a €110 EU-IMF bail-out. Simultaneously, new series of privatisation of state assets has begun, that the government hopes will raise €50bn.

Meanwhile, Greek debt costs soared after German finance minister, Wolfgang Schaeuble, came out publicly saying that a restructuring of Greek debts may be required saying that "further steps" would be needed if analysis showed Athens was unable to service its debts. “If there are doubts about the debt sustainability of Greece, something must be done about it" he added, obviously forgetting that Ireland definitely will not be able to meet the commitments of two successive Irish governments.

In May 2010, both Schaeuble and the Merkel had proposed the "orderly" default of overburdened eurozone states - "the possibility of a restructuring procedure in the event of looming insolvency that helps prevent systemic contagion risks."

There is now a growing consensus that the Greek economy is in meltdown - GDP is predicted to slump by three percent in 2011 after a 4.5 percent decline last year. Analysts say that an increasingly restrictive fiscal policy has produced an economic situation where the country's debt is rapidly growing. AndCyprus might be dragged into the crisis because of the dependence of its banks on the Greek market and their high exposure to Greece’s government bonds – up to 37% of Cyprus’s GDP.

The Greek government is totally opposed to restructuring. The European Commission is also insisting that restructuring is not an option while President van Rompuy supported by the ECB has dismissed such talk as a "magical solution" that must be avoided. The worry is that the move could not be isolated and would quickly entangle other heavily indebted peripheral economies. ECB board member Lorenzo Bini Smaghi warned "The Greek economy would be on its knees, with devastating effects on social cohesion and the maintenance of democracy in that country"

In Greece a growing number of members of the governing Pasok party are publicly backing restructuring as an alternative to further austerity, with the public discourse openly considering the merits of a more thorough-going default. Some 55 percent of the public back some form of restructuring, according to a poll last week while the idea of a ‘debt audit', producing an assessment that separates legitimate debt from ‘odious debt' that would be rejected is gathering support. The government rejects the concept as "science fiction" that would lead to Greece being kicked out of the euro even though membership is a provision of the Lisbon Treaty. Its not only Irish politicians who lie about the EU!

Irish people wouldn’t have to think too hard to figure out why the resistance to ‘restructuring’ emanates from sources such as the Commission and ECB as Germany's Commerzbank, France's Credit Acricole and Belgium's KBC among others still have significant Greek government debt holdings. No wonder the head of the IMF, Dominique Strauss-Kahn has denied widely reported claims that his organisation supports a restructuring of Greek debt. As Noonan says, ‘There’s no appetite for burning bond – holders’.

You must remember this!

This man went on to destroy the country with the bank bailout

Will we have to bail out the ECB!

The ECB has been providing massive amounts of liquidity to eurozone governments both directly through the purchase of government bonds and indirectly by taking on large amount of government debt as collateral for lending to banks. The extent of this is unclear, because of the ECB’s reluctance to publish any data on its holdings of government debt.

JP Morgan, suggests that the indirect exposure of the ECB to the Greek state is massive, estimating that Greek banks have almost €140bn in state related collateral with the ECB. Combining this with the direct holdings of government debt; around €60bn, you get a total exposure of the ECB to the Greek state of around €200bn.

And if we believe the German finance minister and the IMF, who say that Greece will soon need to restructure its debt, this ECB exposure to the Greek state will move centre stage. There are likely to be write downs on the direct holdings of Greek government bonds of at least 35% to have any significant impact on the debt burden and secondly, the Greek - backed paper could become worthless. Potential losses would easily be upwards of €40bn.

Comparing this loss to the capital and reserves of around €79bn which the ECB holds, the situation would not look good following a Greek restructuring. The ECB would then have two choices; ask eurozone governments for an injection of capital or try to print their way back to a reasonable level of capital and reserves.

In other words, it would have to abandon its sacred mission of ensuring price stability and print money or go to governments and ask for cash – in other words a bailout!

Iceland shows its mettle – people before banks!

You probably all remember 2008, when the running joke was: 'What's the difference between Ireland and Iceland?' Answer: 'An 'r' and three months.' Iceland now is in full recovery whilst Ireland's crisis lingers on.

Last week, the people of Iceland for a second time refused via referendum to pay for the debts of the failed private bank Landsbanki Íslands and its online branch, Icesave, which operated in Britain and the Netherlands. Almost 60 percent voted 'No' to an agreement that reduced the interest rate demanded from 5.5 percent down to 3.2 percent.

But the deal would have seen Icelandic taxpayers shouldering the responsibility of the debt, estimated at €11,875 for each of Iceland's 320,000 inhabitants. The result of the referendum was decisive with a turnout of 75 percent. After the Icelandic Icesave internet bank collapsed in the wake of the global economic crisis in 2008, depositors in the Britain and the Netherlands were compensated by their governments to the tune of €3.8 billion. These governments then demanded Reykjavik pay them back.

The president of the country had refused to sign the government bill that approved a schedule of payments to the two governments, provoking a referendum on the matter in March 2010 that saw the earlier deal rejected by 91 percent of Icelanders. President Olafur Ragnar Grimsson also refused to sign the second agreement, again triggering a referendum. By contrast Enda Kenny arrogantly said that we had our referendum on the bailout through the general election.

The Icelandic people have always wanted the Icesave dispute to be dealt with in the courts and now after two unsuccessful attempts to find a fair solution through political negotiations, it will probably now end up in court.

Many legal experts have claimed that Iceland would most likely win using the legal route, which is probably one of the reasons why the British and Dutch governments have repeatedly dismissed the idea of taking the matter to the courts. But no matter how such court cases should go, it is highly doubtful that the results would serve their interests or that of the EU. If Iceland wins, the two governments would not win a penny from Icelandic taxpayers. They would, however, still be paid from the foreign assets of the failed Landsbanki Íslands when they are sold in the coming years.

On the other hand, in the unlikely event of an Icelandic legal defeat, it would mean that not only Iceland but every single country in the European Economic Area (EEA) – which includes all the EU member states – would be responsible for all deposits in their private banks, both domestically and in foreign branches within the EEA, and would have a clear obligation to step in with their taxpayers' money if necessary. That’s just another right mess the EU could get us in!

Some notable quotes.

“We have a Treaty under which there is no possibility of paying to bailout states in difficulty”- German Chancellor, Angela Merkel, 1 March 2010.

“Papandreou has said that he didn’t want one cent. The German government will not give one cent, anyway”- German Economy Minister, Rainer Brüderle, 5 March 2010.

“The euro has been a rock of stability, as illustrated by the contrasting fortunes of Iceland and Ireland”- Former British Labour MEP Richard Corbett, 2009.

“Solidarity is possible, [and] will exist. A bailout is not possible and will not exist”.

Political Federation Necessary - Trichet

ECB President Jean-Claude Trichet has warned eurozone leaders that current plans for economic governance do not go far enough, saying that, Either we prove that we are able to find the new strong reinforced governance concept, which will fit with a constellation of sovereign states and permit the European Union to face up with the new globalised world. Or, we do not convincingly succeed into this direction, and then a new jump in the institutional framework of Europetoward a political federation would appear necessary.

And the Irish Times says that former German foreign minister Joschka Fischer of the Greens has warned that the EU is facing "creeping death" unless Germany seizes the eurozone crisis as a chance for final European integration. According to the paper, Fischer said Berlin was being "disingenuous" in discounting the culpability of German banks – particularly state-owned institutions – in the Irish and Greek financial crisis.Speaking in Berlin at an event organised by the European council on foreign relations, he said that under the "Europe-sceptic Angela Merkel" Germany had ditched its "European vocation". Who would have guessed?

Irish troops for Libya?

EU foreign ministers have resolved to conduct an EU military operation in Libya if the UN requests a mission to support humanitarian relief and protect refugees, reports the Irish Times. Ireland may participate in such an operation, to be known as "EU for Libya", given that it would have a UN mandate.

Foreign affairs minister Eamon Gilmore has said that, "The government will have to discuss that and obviously there are procedures for participation in any mission." With Nato members of the EU already involved in the aerial campaign to enforce the UN no-fly zone over Libya, the initiation of any new mission would deepen Europe's military involvement in the oil – rich country.

Meanwhile, the EU's intelligence bureau, the Joint Situation Centre, has recently sent people to Libya. But its new director says there is little prospect of turning it into a genuine intelligence-gathering service even in the "long term.".We want to avoid the impression that these were spooks of any kind. They were technical specialists who went to help with satellite phones and that type of thing”.

Salmi, a former Finnish secret service chief, earlier told MEPs in the civil liberties committee that the Joint Situation Centre (SitCen) is different from member states' services because it does not hunt for its own information and because it looks at "strategic" threats instead of "operational" intelligence on individual people or terrorist plots.

SitCen currently employs just over 100 people, about 70 percent of whom are seconded from member states' intelligence services and the rest of whom are EU officials.

It has three units: operations, analysis and a section dealing with communications and consular services. It gets information from all 27 member states plus Norway and Switzerland, the intelligence directorate of the EU Military Staff in Brussels, the EU Satellite Centre in Spain, the Frontex border control agency in Warsaw and the Europol joint police body in The Hague. The operations unit handles "crisis monitoring" and is a "kind of 24/7 permanence" for keeping the EEAS and member states' diplomats in Brussels up to date.

"We do monitoring and assessing 24 hours a day and seven days a week, focusing on sensitive geographic areas, terrorism, proliferation of weapons of mass destruction and global threats," Salmi said. "In recent weeks and recent months our focus has been on events in Africa and the Middle East and their implications for EU decision-making."

In an insight into the kind of people that might have been sent to Libya, SitCen last year advertised for a 'Deployable Security Information Officer.' The notice asked for someone "physically fit and stress-resistant. Able to withstand potentially physically and psychologically harsh working environment."

Portugal finally admits that it needs a bailout as Spanish Economy Minister tries, like Canute, to hold back the waves

Portugal’s caretaker Prime Minister, Jose Socrates, announced last week that he had asked the EU to bail out Portugal. In a televised address, Sócrates said: "I want to inform the Portuguese that the government decided today to ask ... for financial help to ensure financing for our country, for our financial system and for our economy. This is an especially grave moment for our country". The exact details of the bailout are still unclear, but Portugal would need between €70bn and €90bn to cover its funding needs for up to three years. The response by financial markets to the announcement has been fairly muted since most investors accepted a bailout as inevitable and had already priced it into their investment decisions.

Portugal’s troubles have also firmly shifted the spotlight onto Spain, given the links between the two economies. Spain is too big to fail and too big to be saved. Hence, the possibility of an attack on Spanish debt would actually pose a threat to the euro as a whole. Estimates place the potential cost of a Spanish bailout at €470bn. Elena Salgado, the Spanish Economy Minister, said that the risk of contagion "is absolutely ruled out...it has been some time since the markets have known that our economy is much more competitive.”

Snouts in the trough!

MEPs have rejected a move to save over €20m a year which would have stopped them from flying business class at the taxpayers' expense. They also voted through a 2.3 per cent increase in their staff and administration budget to €1.7bn – despite the worsening financial squeeze across the EU.

Germany’s regional banks likely to fail EU stress testsThe European Banking Authority has revealed details of the new round of EU-wide stress tests in which 90 European banks will participate. As expected, the core Tier One capital ratio has been set at 5%, lower than the 6% imposed on Irish banks during Ireland’s national stress tests. In another example of the EU turning the screw, German regional banks – the Landesbanken – are among the institutions most likely to fail the tests, since the EBA has announced that its definition of “capital” will exclude most of the so-called “silent participations”, a type of subordinated debt provided to Landesbanken by German state governments. German Finance Minister Wolfgang Schäuble has said that German banks which fail the tests will not get any money from the State. We’ll see!